No More 10 Percent Value-Added Tax for Self-Employment Transfers

Starting next January, self-employed or company transferors need not pay a value-added tax when business types change after transfer.

The transferor had been paying a 10 percent value-added tax for his transfer when the nature of business was altered after the conveyance.

As a result, the business conversion of self-employment such as restaurant businesses will be easier, and demand for start-ups will also increase.

Han Duck-soo, the deputy prime Minister and minister of finance and economy (MOFE) appeared on the KBS 1 TV program “Sunday Analysis” on July 31 and said, “Overall taxation regulations on inheritance and transfers of business will be eased so that the restructuring of self-employed and corporations is facilitated.”

This reflects the reality in which people are reluctant to sell businesses because of the value-added tax that is imposed when business categories are changed after the transfer of all the rights and obligations attached to a business.

For instance, when Mr. A sells his restaurant for 500 million won to Mr. B, who starts running a convenience store instead of the restaurant, A has to pay 10 percent of the transfer price, or 50 million won, as a value-added tax, but no more so from January next year.

Kim Yong-min, the tax system manger at MOFE, noted, “The inheritance and transfer of almost every business category will be exempt from value-added taxes. Detailed criteria will be devised for a mid- to long-term taxation reform plan to be released in August, and the value-added tax enforcement decree will be revised by year-end and fully implemented starting next January.”

In addition, the MOFE has decided to remove the previously-imposed value-added tax on transferors when the transferee of a commercial building repositions the type of business by floors.

However, a value-added tax will be levied as in the current law if the business transferor fails to meet the conditions for inheritance and transfer of businesses, such as transferor partly has the share of the business.

Meanwhile, Deputy Prime Minister Han said, “We will finalize our position on the issue of large corporations building factories worth 3.5 trillion won in the capital area by the end of August.”

legman@donga.com